Reduce Castrol India Ltd - Kotak

- We expect Castrol's near term performance to be under pressure mainly on account of 1). Weak demand impacted by the overall slowdown in the economy, 2). Higher raw material cost due to significant rupee depreciation and 3). Competition from OMCs.

- The company's margins are expected to remain under pressure on account of competition from OMCs and rising cost pressure (~5% depreciation of rupee). In Q3CY12, margins fell by 320 bps YoY to 16.6%. On a full year basis, we expect Castrol to report an EPS of Rs. 8.7 in CY12E & Rs. 9.6 in CY13E and cash EPS of Rs. 9.2 in CY12E & Rs.10.2 in CY13E. Castrol's management has also guided that the next few quarters are likely to be challenging.

- On the basis of our estimates, the stock at current market price of Rs.299 is expensively valued at 10.5x EV/EBIDTA, 31.1x P/E and 20.6x P/BV on the basis of CY13E earnings.

- Based on our DCF valuation model, the target price of Castrol comes to Rs. 265 (earlier Rs.302). We have cut our estimates mainly to reflect the slowdown in the demand and cost. Hence, we maintain our REDUCE rating on Castrol on account of weak business environment.

Source : Equity Bulls

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